On 5 October 2020, the Federal Court in Innab Salil & Ors v Verve Suites Mont’ Kiara Management Corporation (Civil Appeal No: 02(i)-74-10/2019(W)) laid down a landmark decision that Management Corporations and Joint Management Bodies under the Strata Management Act 2013 (“SMA 2013”) are entitled to create by-laws prohibiting short-term rental of the units in buildings under their management.

Background Facts

The appellants (“Innab Salil”) are owners of various units in Verve Suites Mont’ Kiara. In 2018, the respondents (“Verve Suites”) passed a resolution restricting the rental of the units for short term stays (“House Rule”). However, despite the by-law, Innab Salil continued to engage in arrangements for short-term rentals, which led to Verve Suites taking legal action against them.

The crux of the Innab Salil defence was that their right to rent out their premises for a short-term is allowed within the ambit of “any other dealing” as provided for in section 70(5) of the SMA 2013. Under this section, “dealings”, which include tenancies, are exempt from registration under section 213 National Land Code 1965 (“NLC”). Innab Salil contended that Verve Suites’ action of prohibiting them from renting out their units for short-term rental constitutes a breach of their right under section 70(5) of the SMA 2013.

Decision of the High Court and Court of Appeal

The High Court found that Innab Salil’s likening of short-term rentals to “tenancies exempt from registration” is tantamount to saying that hotel guests are tenants exempt from registration. Her Ladyship, Hue Siew Kheng J, opined that the relationship between the houseguests and Innab Salil is, like that of hotel guests, one of licensee and licensor, and therefore the restriction of short-term rental does not fall within section 70(5) SMA 2013. On the facts, Innab Salil’s house guests had on many occasions misused the common facilities at the property and caused nuisance to the residents. This compromised the safety and security measures set in place by Verve Suites. Since management bodies of strata properties are empowered by sections 59 and 70(2) SMA 2013 to create by-laws restricting activities for the purpose of safety and security measures, Verve Suites was well within its statutory power in creating such a House Rule.

Upon appeal, the Court of Appeal upheld the decision of the High Court. It agreed with the High Court that the relationship between Innab Salil and the short-term renters is one of licensor and licensee, and not one of landlord and tenant. The Court of Appeal further opined that in determining the nature of the occupancy, it matters not what label parties ascribed to in their transaction or even the length of the stay by the short-term renters, but the nature of the stay. Merely temporal and transient stays cannot be said to amount to tenancies exempt from registration provided under the NLC.

Aggrieved by the decisions, Innab Salil appealed to the Federal Court.

Issues before the Federal Court

The issues before the Federal Court were two-fold:

• firstly, whether the House Rule may override and supersede the express land use on the title imposed by the State Authority under section 120 of the NLC; and
• secondly, whether the Management Corporation’s enforcement of the House Rule is in violation of section 70(5) of the SMA 2013.

Federal Court’s Decision

Whether the House Rule may override and supersede the express land use on the title imposed by the State Authority under section 120 of the NLC

Innab Salil contended that Strata Management by-laws cannot negate the express land use on the title of the land as imposed by the State Authority. House Rules only ought to merely regulate instead of prohibit entirely the business of short-term rentals. To this, the court found that the restrictions imposed by the House Rules are additional conditions for purposes of regulation under section 70 of the SMA 2013 and not for the purpose of violating any pre-existing express condition in the land title. Therefore, the Management Corporation did not at all override nor supersede the express land use on the title with the by-law prohibiting short-term rentals.

The Federal Court’s decision was based on the case of Weng Lee Granite Quarry Sdn Bhd v Majlis Perbandaran Seberang Perai [2020] 1 MLJ 211, where the court clarified that, generally speaking, even if a particular statute confers a certain right or interest in land, such right is not unfettered and as such, is capable of regulation for specific purposes. In that case, the regulation of the local authority was deemed expedient as there were certain pressing environmental and safety concerns with regards to the appellant’s quarrying. Thus, in the present case, the Federal Court held that even if the State Authority permits the use of the land for commercial purposes, such use is still subject to other laws in force, in particular section 70 of the SMA 2013. Hence, the passing of the House Rule prohibiting short-term tenancy is not unlawful against the SMA 2013.

Whether the Management Corporation’s enforcement of the House Rule is in violation of section 70(5) of the SMA 2013

The court, in arriving at its decision with regards to the second issue, scrutinised the interpretation of “tenancy”. The court referred to the case of Woo Yew Chee v Yong Yong Hoo [1979] 1 MLJ 131, and Mohamed Mustafa v Kandasami [1979] 2 MLJ 109, and ultimately found that there is no singular test to determine whether an occupancy is a tenancy or a license – the answer depends on the facts and circumstances of the case.

In the present case, Innab Salil did not actually dispute that short-term occupancies via online booking sites are no different from the arrangements between hotels and its guests. There was also nothing in the documents before the courts to support the contention of exclusive possession which was put forward by Innab Salil. Neither was there any indication that Innab Salil and the short-term renters intended for the nature and quality of the occupancy to amount to a tenancy under the definition of the NLC. Henceforth, after examining the facts, the court found that the short-term rentals in this dispute did not amount to tenancies but to licenses. As such, it did not fall under the protection of section 70(5) SMA 2013.

Commentary

This judgment of the Federal Court reinforces the entitlement of Management Corporations and bodies under the SMA 2013 to create by-laws restricting the engagement in short-term rentals of the owners’ units. Management bodies can now safely create by-laws with the intention of curbing short-term rentals in the buildings under its management.

On the other hand, homebuyers with the intention of investment via short-term rental business activities are advised to take the necessary steps to ensure that the targeted property allows for short-term rentals across all platforms, including but not limited to Airbnb, Agoda Homes, and Booking.com. This may be in the form of making proper enquiries before the purchase of the said property.

Similarly, in order to provide assurance to homebuyers, developers can also opt to enter into deeds of mutual covenants with the purchasers, expressly specifying the use of the relevant property for short-term rentals, and restricting the making of by-laws that prohibit short-term rentals within the property. This would not only safeguard the purchasers’ interests, but also ensure that potential homebuyers are well-informed of the use of the development so as to prevent future legal complications. This would then create a win-win situation for both the aspiring “Airbnb” hosts and the developer (and subsequently the management body).

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the Zaid Ibrahim & Co partner you usually deal with. This article was prepared with the assistance of Audrey Lim Shu Ting of Zaid Ibrahim & Co.

This alert is for general information only and is not a substitute for legal advice.